Calculating The Intrinsic Value Of Sensirion Holding AG (VTX:SENS)

Key Insights

• Sensirion Holding's estimated fair value is CHF69.97 based on 2 Stage Free Cash Flow to Equity

• Sensirion Holding's CHF68.00 share price indicates it is trading at similar levels as its fair value estimate

• The CHF81.80 analyst price target for SENS is 17% more than our estimate of fair value

In this article we are going to estimate the intrinsic value of Sensirion Holding AG (VTX:SENS) by projecting its future cash flows and then discounting them to today's value. We will take advantage of the Discounted Cash Flow (DCF) model for this purpose. It may sound complicated, but actually it is quite simple!

We would caution that there are many ways of valuing a company and, like the DCF, each technique has advantages and disadvantages in certain scenarios. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you.

See our latest analysis for Sensirion Holding

Crunching The Numbers

We are going to use a two-stage DCF model, which, as the name states, takes into account two stages of growth. The first stage is generally a higher growth period which levels off heading towards the terminal value, captured in the second 'steady growth' period. In the first stage we need to estimate the cash flows to the business over the next ten years. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.

Generally we assume that a dollar today is more valuable than a dollar in the future, and so the sum of these future cash flows is then discounted to today's value:

10-year free cash flow (FCF) forecast

	2024	2025	2026	2027	2028	2029	2030	2031	2032	2033
Levered FCF (CHF, Millions)	-CHF6.20m	CHF20.8m	CHF30.0m	CHF39.3m	CHF47.9m	CHF55.2m	CHF61.1m	CHF65.7m	CHF69.2m	CHF71.7m
Growth Rate Estimate Source	Analyst x1	Analyst x1	Est @ 44.31%	Est @ 31.04%	Est @ 21.75%	Est @ 15.25%	Est @ 10.70%	Est @ 7.51%	Est @ 5.28%	Est @ 3.72%
Present Value (CHF, Millions) Discounted @ 5.5%	-CHF5.9	CHF18.7	CHF25.6	CHF31.7	CHF36.6	CHF40.0	CHF42.0	CHF42.8	CHF42.7	CHF41.9

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = CHF316m

After calculating the present value of future cash flows in the initial 10-year period, we need to calculate the Terminal Value, which accounts for all future cash flows beyond the first stage. The Gordon Growth formula is used to calculate Terminal Value at a future annual growth rate equal to the 5-year average of the 10-year government bond yield of 0.08%. We discount the terminal cash flows to today's value at a cost of equity of 5.5%.

Terminal Value (TV)= FCF₂₀₃₃ × (1 + g) ÷ (r – g) = CHF72m× (1 + 0.08%) ÷ (5.5%– 0.08%) = CHF1.3b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= CHF1.3b÷ ( 1 + 5.5%)¹⁰= CHF773m

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is CHF1.1b. The last step is to then divide the equity value by the number of shares outstanding. Compared to the current share price of CHF68.0, the company appears about fair value at a 2.8% discount to where the stock price trades currently. Valuations are imprecise instruments though, rather like a telescope - move a few degrees and end up in a different galaxy. Do keep this in mind.

dcf

Important Assumptions

The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the cash flows. You don't have to agree with these inputs, I recommend redoing the calculations yourself and playing with them. The DCF also does not consider the possible cyclicality of an industry, or a company's future capital requirements, so it does not give a full picture of a company's potential performance. Given that we are looking at Sensirion Holding as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighted average cost of capital, WACC) which accounts for debt. In this calculation we've used 5.5%, which is based on a levered beta of 1.087. Beta is a measure of a stock's volatility, compared to the market as a whole. We get our beta from the industry average beta of globally comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.

SWOT Analysis for Sensirion Holding

Strength

• Currently debt free.

Weakness

• Earnings declined over the past year.

Opportunity

• Annual earnings are forecast to grow faster than the Swiss market.

• Current share price is below our estimate of fair value.

Threat

• Revenue is forecast to grow slower than 20% per year.

Looking Ahead:

Whilst important, the DCF calculation shouldn't be the only metric you look at when researching a company. It's not possible to obtain a foolproof valuation with a DCF model. Instead the best use for a DCF model is to test certain assumptions and theories to see if they would lead to the company being undervalued or overvalued. For example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. For Sensirion Holding, there are three further elements you should further examine:

1. Risks: We feel that you should assess the 3 warning signs for Sensirion Holding (1 is a bit unpleasant!) we've flagged before making an investment in the company.

2. Future Earnings: How does SENS's growth rate compare to its peers and the wider market? Dig deeper into the analyst consensus number for the upcoming years by interacting with our free analyst growth expectation chart.

3. Other Solid Businesses: Low debt, high returns on equity and good past performance are fundamental to a strong business. Why not explore our interactive list of stocks with solid business fundamentals to see if there are other companies you may not have considered!

PS. Simply Wall St updates its DCF calculation for every Swiss stock every day, so if you want to find the intrinsic value of any other stock just search here.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.